Examples: Effect of minimum rate & IHT

Facts

Mr A had a business on which he did not disclose tax liabilities (either VAT or direct tax), and put all the income arising from that business in a Swiss account. He died in 2005. The Swiss account then held a total £500k, which was inherited by Mrs B as sole beneficiary. She was also the executor of Mr A’s estate. She opened a new account in Switzerland, but no IHT was paid.

31/12/05

£500,000

cb

Interest and gains

£20 k pa

£100k

31/12/10

£600,000

C8

Interest and gains

£25k p.a

£50k

31/12/12

£650,000

C10

Find the relevant values for the formula

n = 5

C10 < C8 x 1.2 (720,000) but C10 > C8, so Cr is C10 = £650,000

So C9 = 650,000 x 103% = £669,500

So C10 = 650,000 x 106% = 689,000

Calculate the formula result

T=

34% x

{[2/3(650,000 - (5/8 x 500,000)]

[1/3((5/10 x 650,000) +

2/10(669,500 +

+

689,000/2))]}

T =

34% x

{[2/3(650,000 - 312,500)] +

[1/3(325,000 + 2/10(679,250)]}

T =

34% x

{[2/3 x 337,500] +

[1/3(325,000 + 135,850)]}

T=

34% x

{225,000+ 153,617}

T =

34% x

378,617

T =

£128,730

Is there an increased charge?

tc = T / Cr

tc = 128,730 / 650,000 = 0.198

tc < 0.34 so no increased charge.

But tc < 0.21 so there is a minimum rate of 21% on Cr.

So T = 650,000 x 21% = £136,500

Which assets are eligible for clearance?

Maximum value of cleared assets = Cr

Cr = £650,000

The value of assets in the account at any time between 31/12/10 and 31/12/12 inclusive does not exceed £650,000.

Therefore all the assets in the account at 31/12/12, with total value £650,000, are eligible for clearance